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How Economic Value Added (EVA) is Used to Measure Performance?

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Economic value added (EVA) is used to measure performance by the following ways:

Economic value added (EVA), today’s leading idea in corporate finance and one of the most talked about in business, is far from the newest concept. On the contrary: Earnings more than the cost of capital is about the oldest idea in enterprise.

But just as Greece’s glories were forgotten in the Dark Ages, to be rediscovered in the Renaissance, so the idea behind EVA has often been lost in ever darker muddles of accounting. Managers and investors who come upon it as if they have seen a revelation.

Prominent corporations the feel strongly about its ability to deliver improved company performance. Most EVA adopters allude to stock price increases as an outcome of implementing EVA performance measurement in their companies. The two numbers show a remarkable tendency to move up and down together.

However, while an individual firm may observe this EVA-stock price relationship the empirical research to date does not support such a generalization. Regardless of actual versus perceived benefits of stock price performance; however, companies are embracing the EVA philosophy with fervor.

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The idea of comparing profits with the cost of capital used to produce them results in a net measure showing how much value has been created or destroyed by the firm during the period. This is an intuitively appealing concept. EVA adopters appear to use some metrics less frequently than non adopters.